Thursday, October 23, 2008

PIMCO’s Mohamed El-Erian on Emerging Markets: Focus On Fundamentals, Aggressive Policies Will Help In Time

Vetting on the wisdom of PIMCO’s Mohamed El-Erian who recently wrote about the current crisis (all highlights mine)…

Mr. El-Erian: ``Many developing countries were fortunate to enter this crisis in relatively strong shape. They had large holdings of international reserves, limited leverage and relatively low indebtedness. Policy flexibility was also considerable, as reflected in the ability to prudently use monetary and fiscal policy in a countercyclical manner. And internal consumption was picking up momentum.

``The robust initial conditions have served to partially insulate the developing world from the effects of the global financial crisis that most observers rightly classify as the worst since the 1930s. Contrary to what would be expected on the basis of the experience of the past 30 years, there has been no dramatic collapse in growth and consumption; widespread defaults have not materialized; and many governments retain their core policy credibility.”

My interpretation:

Emerging markets are stronger and more equipped today to cope with the present crisis.

There have been little signs of the prospects of a global depression.

Mr. El-Erian: ``What's more, the favorable initial conditions will provide little comfort for emerging-market equity investors. The long-term story in these markets may still look good, but investors are sitting on large losses now. Why? In major global dislocations like the one we are experiencing, fundamental drivers of value get totally overwhelmed by "technicals." Foreign investors, facing large losses at home, all scramble to repatriate their funds at the same time. The emerging-market equity door is simply not big enough to accommodate them all without a large and disorderly decline in prices.

``Provided they are sufficiently liquid and that their portfolios are not overly concentrated, investors should think twice before joining this stampede. As a rule, long-term value investors should not become distressed sellers on account of technical factors alone. They should be guided primarily by their views on fundamentals, which will once again assert themselves over time. Moreover, help is on the way. Emerging markets will be aided, albeit neither immediately nor smoothly, by the aggressive policy decisions now being taken in industrial countries.”

My interpretation:

Deleveraging, Fear and Momentum trades have basically driven EM equities to the cellar.

Investors should avoid the bandwagon or herd mentality effect and ruminate on fundamental issues instead. Those who focus on fundamentals will be promptly rewarded.

Like us, Mr. Mohamed El-Erian thinks that aggressive policy decisions by Industrial nations will help EM markets overtime. In Global Market Crash: Accelerating The Mises Moment!, we also noted ``So while today’s market has almost gutted most of the global financial markets (equities, commodities, bonds and currencies-yes newspapers focus on stocks but contagion has been across the board) as a result of massive deleveraging and stress in the global banking system, once such policies sink in or diffuse, we are likely to see divergent economic performances that should be reflected on the markets once the panic subsides.”

So we have a growing chorus of bullish contrarian gurus in a world driven by fear. The very same clique who successfully foretold of this crisis.

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